International Trader - Asia

Asia's No. 2 Growth Story

The Indonesian bourse has jumped 4.5% year-to-date and hit an all-time high on Feb. 13. Indonesia's economy is expected to grow 6.7% this year, making it the fastest growing economy in Asia after China.

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Move over China and India. Having underperformed its Southeast Asian peers last year despite a very respectable 13.7% gain, the Indonesian bourse has jumped 5.7% year-to-date and hit a new all-time high on Feb. 13. Last year's shortfall seems like an anomaly: Between 2002 and 2011, Jakarta was Asia's best performing stock market with a near sevenfold rise as the country clawed its way back from the Asian financial crisis.

"There is a lot of noise and headline risk with elections due next year, but Indonesia remains a strong growth story," says Mark Matthews, strategist for Julius Baer in Singapore. The economy of the massive archipelago, with a population of 242 million, is likely to grow 6.7% this year, up from a 6.2% pace last year, making it the fastest growing economy in Asia behind China. Like many of its counterparts around the world, the country's central bank is keeping interest rates at historic lows to promote growth despite a weakening currency, a widening current account deficit and higher wages.

Strategists see room for more stock market gains. Equities trade at a multiple of 15 times current corporate earnings and around 14 times next year's forecast profits. Wilianto Ie, Nomura's strategist in Jakarta, estimates earnings growth will top 15% this year and surge 19% next. "No other market in Asia is delivering the way Jakarta is," he says. Matthews adds that Indonesian companies' balance sheets are stronger now than they've ever been and management is stronger.

"Indonesia is as cheap a market as it was a decade ago," says Matthews.

For the more knowledgeable or adventurous, there are lots of opportunities. Nirgunan Tiruchelvam, analyst for Standard Chartered in Singapore, says consumer stocks are likely to get a new wind from the recent 23% increase in minimum wages, which will cause an 8% rise in overall wages annually between now and 2015. Following the last wage hike in 2001, household consumption rose 3.7% and 6.3% in the next two years.

He likes Japfa Comfeed (JPFA.Indonesia), a poultry feed producer whose shares have risen 92% over the past year but still trade at just 11 times this year's earnings. He has a 7,617 rupiah (US 80 cents) price target, or 9% higher.

Nomura's Ie thinks consumer shares are too pricey, and prefers infrastructure. He recommends cement companies like Semen Indonesia (SMGR.Indonesia), which is up 46% over the past year, and contractors that are building toll roads or power plants like Jasa Marga (JSMR.Indonesia) or Wijaya Karya (WIKA.Indonesia). "Infrastructure stocks are still around 15 times this year's earnings with earnings growth in some cases 20% to 25% or much faster than the overall market," he notes. Ie also likes auto assemblers and distributors Astra International (ASII.Indonesia) and Indomobil Sukses (IMAS.Indonesia).

With no clear front-runner in next year's polls some foreign investors worry that a new president might pursue a narrow economic nationalistic agenda or dilute reforms like cutting fuel subsidies. But in light of Indonesia's growth, it would be hard for anyone to campaign for a sharp change in course.

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